The Role of Innovation in Startup Business Financing, Performance, and Survival

Abstract

Startups are the new firms that drive innovation. However, they struggle due to their newness and smallness to finance their innovation, which often tends to fail. In this context, the chapter unfolds the role of innovation in startup firms' financing, performance, and survival. Contrary to conventional investments, innovation projects require heavy funds in R&D activity. The risks in innovation projects combine with the firm's information asymmetries elevate the cost of financing for the innovative startups. Equity investors such as business angels and venture capitalists mainly fund innovative startups. Founder's human capital signals also affect startup financing. Innovation positively impacts startup firm performance. Process and incremental innovations improve startup survival chances, whereas product and radical innovations reduce the same. The authors propose that innovation enhances survival if it increases market power and lessens production costs while hampering longevity if the innovative firm is burdened with the immoderate liabilities of newness and tininess.